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Oil Companies Flock To Kurdistan, Angering Baghdad Authorities

Big oil companies don’t think much of Iraq’s threats. They are lining up for oil prospection in Kurdistan, despite Baghdad’s ban on signing contracts with Kurdish authorities. Last week, Total announced it was purchasing 35% of two blocks located in Iraqi Kurdistan, while the Russian oil giant Gazprom Neft bought stakes in two blocks that could potentially contain 3.6 billion barrels of oil equivalent.

These announcements have incurred Baghdad’s wrath, with the Iraqi central government faced off against Kurdish authorities on the distribution of oil wealth. “We will punish companies that sign contracts without the central-government and the Oil Ministry’s authorization,” threated Hussein Chahristani, a spokesperson for the Iraqi vice prime minister in charge of energy, adding that if Total doesn’t cancel the contracts, the consequences would be “very dire.”

Breaking with Baghdad

Yet Total and Gazprom are only following the crowd. Last July, Chevron also bought majority stakes in two Kurdistan blocks. ExxonMobil was the real precursor in October 2011, when it ignored pressure from Baghdad and signed six prospection contracts in Kurdistan, breaking down a taboo.

Why this sudden interest in the region? It has over 30% of Iraq’s 143 billion barrel oil reserves. More importantly, Kurdistan, who gained autonomous status from Iraq in 1970, offers production sharing contracts that are much more lucrative than the one to two dollar service contracts set up by Baghdad.

Up until now, major oil companies stayed away from the area out of fear of irritating Iraqi leaders. ExxonMobil was shut out of Iraq’s latest invitation to tender, but the group has kept exploitation rights for the vast Qurna-West oilfield. It would be surprising for Total to lose its 18.75% participation in the Halfaya field. “If the government cancels the participation of oil companies, it loses essential foreign investment and expertise,” writes Siddik Makir, a consultant with IHS business information services.

One final advantage is that the Kurdistan contracts enable companies to put pressure on Baghdad to obtain better conditions in the rest of the country. It is a way to change the balance of power.

Geopolitical ramifications

From a logistical standpoint though, the oil companies aren’t making a sure bet. “Kurdistan is a very isolated region,” says one expert. Oil exports from the region transit via pipelines controlled by Baghdad. To avoid this obstacle, Kurdistan is cooperating with Ankara to build a pipeline to directly export crude to Turkey, which has strained relations between Ankara and Baghdad.

These contracts have an enormous geopolitical impact. By setting up in Kurdistan, the big oil companies are indirectly favoring the region’s independence, which could push the Sunni provinces to ask for the same and provoke the country’s break-up. Shia Prime Minister Nouri al-Maliki is close to Tehran and wants to keep Iraq united. Facing him are Kurdish and Sunni opponents, brought together in an alliance supported by Turkey. In this arm wrestling match, oil contracts are key.

France's top business daily, Les Echos covers domestic and international economic, financial and markets news. Founded in 1908, the newspaper has been the property of French luxury good conglomerate LVMH (Moet Hennessy - Louis Vuitton) since 2007.